Susan Tompor

What to know: Social Security retirement benefits could see big hike in 2022

Predictions that Social Security retirement benefits could be heading for a 6.2 percent hike in 2022, thanks to a bump in inflation, could lead some baby boomers to figure they’ve got one less reason to wait to claim benefits. After all, those claiming retirement benefits are going to get more money next year. Why not rush to claim at age 62 or 63 now if you’re going to get extra dough? Well, experts warn that you might want to rethink that one. Social Security retirement benefits are turning into one hot topic as we’re hearing more buzz about a future hefty cost of living adjustment next year. The cost of living adjustment, known as COLA, was a mere 1.3 percent in 2021 — raising the average benefit by about $21 for monthly payments and making it one of the lowest increases on record since 1975 when Social Security started automatic annual cost-of-living allowances. What’s ahead in 2022? Next year, we’re talking real money. Some retirees could be looking at an extra $100 a month, based on an average Social Security retirement monthly payment of $1,655.71 in July. We won’t know the official cost of living adjustment for 2022 until the Social Security Administration makes that announcement in October. The percentage is determined after the U.S. Bureau of Labor Statistics releases the September Consumer Price Index. Any increase due to COLA will show up in checks and direct deposit benefits paid in January. Right now, it looks like the cost-of-living adjustment is going to be around 6.2 percent, according to the Senior Citizens League, a nonpartisan group dedicated to protecting and strengthening Social Security benefits. Why the Social Security hike? Oddly enough, much of that higher payout can be attributed to a shocking spike in gasoline prices, according to the group. Under current law, Social Security benefits are adjusted using the Consumer Price Index for Urban Wage Earners and Clerical Workers. The Senior Citizens League notes that the index reflects the spending patterns of younger working adults who drive a lot, not retirees. As a result, the group said, the index is more heavily weighted for gasoline prices, which went up 41.8 percent in the past 12 months. A potential 6 percent bump is pretty unusual after low inflation. But there have been other years of high COLA increases. By comparison, other sizable inflation-adjustments for Social Security included: 5.8 percent for payments in 2009; 5.4 percent in 1991; 7.4 percent in 1982; and 11.2 percent in 1981. The largest increase was 14.3 percent in 1980, according to Social Security data. No Social Security cost of living adjustments were made in 2016, 2011 or 2010. Should you jump on the retirement bandwagon? If you’re thinking about retiring, an estimated 6 percent COLA hike might tempt you to throw in the towel at work and claim Social Security benefits at 62. But here’s why you don’t want to do that. Mary Beth Franklin, a renowned author specializing in unraveling Social Security intricacies, says she has heard some financial planners wonder whether it’s a good time to claim benefits now to lock in that eye-catching cost-of-living adjustment. And she uncovered something most people don’t know. Her take is that anyone who is age 62 or older in 2022 and who is eligible for Social Security will profit from next year’s COLA, even if they have not yet filed for benefits. “I worry that some people may rush to claim Social Security this year to benefit from the exceptionally large cost-of-living adjustment expected next January,” Franklin told me by email. “I’m sure most people do not realize that they automatically will benefit from next year’s COLA — even if they have not yet filed for Social Security — as long as they are at least 62 or older in 2022,” said Franklin, who wrote “Maximizing Social Security Benefits,” an online book that is available for $29.95 at MaximizingSocialSecurityBenefits.com. If there are future inflation adjustments, she noted, those who are 62 and older would see inflation adjustments baked into future payments each year until they claim benefits all the way up to when they reach age 70. She points out that the Social Security Administration notes: “You’re eligible for cost-of-living benefit increases starting with the year you become age 62. This is true even if you don’t get benefits until your full retirement age or even age 70.” You can begin to receive Social Security benefits as early as age 62, but you’re getting a far lower monthly payout if you claim benefits long before reaching a full retirement age. Those who turn 62 next year and afterward face another issue, too. Anyone who was born in 1960 or later has a full retirement age of 67. (If you were born on Jan.1, you’d refer to the previous year.) Once that full retirement age was 65. But it has been gradually moving higher. It moved to age 66 for those born in 1943 to 1954. It jumps to 66 and two months for those born in 1955 and after. It gradually climbs upward by two-month increments and it hits 66 years old and 10 months for those born in 1959. For those turning 62 in 2022 and after, the retirement benefit is reduced by 30 percent — or $300 on a $1,000 monthly payment — if that group claims at 62 instead of age 67. Each year that you wait past age 62, you get a higher payout. The Social Security Administration said it adds cost-of-living increases to your benefit beginning with the year you reach 62. And benefits then could be adjusted each year to reflect any increase in the cost-of-living as measured by the Consumer Price Index. It’s great news for some end-of-the-line baby boomers who have not yet retired or claimed Social Security retirement benefits. The cost-of-living adjustment will, of course, provide extra cash for retirees and seniors who are already collecting Social Security retirement benefits. But Franklin also warns that retirees age 65 and older need to watch out for premium hikes for Medicare Part B, which are expected to rise in 2022 and could erode some of the COLA increases in Social Security. Part B covers outpatient and diagnostic services. Its monthly premium, which is deducted from Social Security benefits, changes on a yearly basis. Franklin said the amount of the premium increase would be known in November. Ways to look at Social Security People can apply up to four months before they want their Social Security retirement benefits to start. When they’re ready to apply for retirement benefits, they can use the online retirement application at SSA.gov. In Michigan, there were nearly 1.54 million people receiving Social Security retirement benefits as of December 2020, the most recent information available. Michigan’s state population as of April 1, 2020, was at 10.1 million people. So nearly 15 percent of the population receives Social Security retirement benefits. Laurence Kotlikoff, professor of economics at Boston University, said he’s quite concerned that inflation will continue to be higher in the years ahead. If inflation continues, he said, many people are better off waiting to take Social Security past age 62 so that they ensure a larger share of their old age income is inflation-protected. “Inflation should make you more prone to being patient when taking Social Security,” said Kotlikoff, who is president of Economic Security Planning, which offers an online tool called “Maximize My Social Security” for $40 a year for individuals. Kotlikoff said even without the concerns of inflation, waiting to take Social Security closer to age 70 is the “best move by a mile for roughly three quarters of households.” He said the inflation-adjusted benefit at 70 is 76 percent higher than at age 62. If prices are going up, he said, waiting to take Social Security closer to full retirement age offers a roughly 7.6 percent hedge for each year you wait. Kotlikoff, co-author of “Get What’s Yours — the Secrets to Maxing Out Your Social Security Benefits,” notes that people can tend to live longer than they’d expect and delaying claiming Social Security benefits for as long as possible can be both a hedge against inflation and longevity. Rushing to make a move just based on the Social Security headlines could end up being the exact wrong thing to do for some in their early 60s. Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at [email protected]

Why now isn’t a bad time to take out a car loan or mortgage

The pandemic knocked borrowers on their backs in the spring of 2020, but as the economy regained its footing, so, too, has the willingness of consumers to borrow. Consumer applications for auto loans, new mortgages and revolving credit cards all mostly returned to pre-pandemic levels by May 2021, according to a new report by the Consumer Financial Protection Bureau. Skyrocketing unemployment a year ago crushed demand for credit. Who wanted to take on a big car payment when they were unsure whether they could make the old car payment? Or if they weren’t driving to work but instead setting up shop at home? Auto loan inquiries, for example, plunged 52 percent by the end of March 2020. States in the Northeast and California, together with Michigan and Nevada, experienced the largest drops. Many are vaccinated and back to borrowing Going forward, economists say the outlook hinges on the path of the virus and vaccination efforts. The jobs picture improved after progress was made getting people vaccinated and we saw strong stimulus support programs roll out of Washington. But the economic recovery could still face stops and starts. The Federal Reserve policy committee moved July 28 to keep short-term interest rates at the near zero level as worries about the delta variant spread. The Fed noted: “The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered.” Make no mistake, everyone isn’t finding ready access to low-cost loans. “Despite the overall trend toward a recovery, we find that consumers with deep subprime and subprime scores still have not recovered to their pre-pandemic levels, likely in part due to a tightening of credit for these consumers,” the Consumer Financial Protection Bureau noted. Other key trends from the CFPB brief include: • Mortgages: When it comes to shopping for mortgages, we’ve seen unusually high activity in the mortgage market throughout the pandemic following a brief initial dip. Inquiries have exceeded their usual, seasonally adjusted volume by 10 percent to 30 percent, reflecting low interest rates and a stronger housing market. • Credit cards: Consumers appeared to be the least willing to put another piece of plastic into their wallets. It took a full year — from March 2020 until March 2021 — for revolving credit card inquiries to recover back to their usual levels. • Car loans: Consumers with excellent credit or super prime scores surprisingly are not shopping for car loans at pre-pandemic levels. But the report noted that there could be a drop in demand for credit among this group of consumers, which may include workers who are able to work from home may not want to buy a new car if they’re not commuting. (The report didn’t note that a lack of cars and trucks may be coming into play or how the semiconductor squeeze cut into inventories and sales. But that, too, could be an issue.) Overall, the consumer’s willingness to take out an auto loan returned back to pre-pandemic levels by January 2021, according to data reviewed by the federal agency, which was established after the 2008 financial crisis. Low auto loan rates help offset high prices Jonathan Smoke, chief economist for Cox Automotive, said credit conditions have been favorable all spring and summer, supporting strong demand for car and truck sales. Credit to buy a car is easier to get than it was a year ago, he said, shifting back to where it was before the pandemic started. “Rates continue to be lower than a year ago,” Smoke said. “Spreads had widened last year during the pandemic, especially for lower credit tiers.” But now most car loan borrowers have seen lower rates, he said, especially subprime borrowers who have seen lower rates this spring and summer. “Now that bond yields are retreating from their early spring highs,” Smoke said, “it is likely that consumers will continue to see low and attractive rates on auto loans.” And lower auto loan rates can help to offset the impact of price increases since most people take out a loan to buy a car or truck. Not surprisingly, consumers are more willing to borrow if they’re feeling more secure about their jobs outlook and their finances. Total consumer credit shot up 10 percent in May, according to Federal Reserve Consumer Credit Report. That’s the biggest increase in five years. What’s a good deal on a car loan, mortgage, credit card? “The biggest factor in the renewed borrowing interest is the improved, and reopening, economy,” said Greg McBride, chief financial analyst for Bankrate.com. The fearful economic “what ifs” of 2020 are giving way to a greater confidence in a stronger economy, he said. Low rates also are helping fuel many purchases. The average fixed rate for a 30-year mortgage is 3.04 percent — down from 3.3 percent last year, according to Bankrate.com. An even better rate of 2.5 percent is available with no points. (Mortgage points amount to extra fees that a borrower pays a lender to reduce the interest rate and lower the monthly payment. The upfront cost can make sense if you plan to stay in the home or hold onto the mortgage for a long time.) When it comes to a five-year new car loan, the average rate is 4.15 percent now, down from 4.24 percent last year. McBride noted the best rates are in the low 2 percent range, but occasionally you’ll see credit union offer deals of 1.99 percent. Average rates on a four-year used car loan are around 4.71 percent — down from 4.99 percent a year ago. Again, he said, the best rates can be in the 2 percent range for borrowers with strong credit. When it comes to credit cards, the average rate is now 16.16 percent, according to Bankrate.com. That’s up a bit from 16.04 percent last year. But borrowers with strong credit can get much better deals. Some promotions are offering 0 percent for up to 18 months for purchases and balance transfers, McBride said. Credit card debt tumbled, as consumers paid down high-cost credit card debt and cut back on big vacation spending and other purchases for much of the past year. Credit card balances fell by $49 billion in the first quarter, the second largest quarterly decline in the history of the data since 1999, according to the Federal Reserve Bank of New York. Credit card balances are $157 billion lower than they had been at the end of 2019. By contrast, balances continued to increase for mortgages, student loans and auto loans. The Fed noted that auto loan balances grew for the past three quarters and increased by $8 billion in the first quarter of 2021, after a brief pause in the second quarter of 2020, when many dealerships were closed. The Fed noted that older consumers — particularly those age 60 and up — may continue to be more cautious about the risks of the virus itself and may be using their credit cards less frequently, while younger people resumed spending and their outside activities. Consumers, no doubt, found themselves on a firmer financial footing after three rounds of stimulus checks — and now many families are seeing hundreds of dollars in monthly advance payments from July through December for the child tax credit. Some of that extra cash — and extra confidence in the economy — clearly deserves some credit for the rebound in borrowing. Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at [email protected]

Tax season has begun. What to know before you file

What will likely be a challenging tax season kicked off Feb. 12 as the Internal Revenue Service finally began processing 2020 federal income tax returns. The tax season started about two weeks later than last year, reflecting the extra time the IRS said it needed to program and test its systems after last-minute tax law changes in Washington provided a second round of Economic Impact Payments and other pandemic relief benefits. “We are ready,” said IRS Ken Corbin, the new IRS chief taxpayer experience officer, a newly-created position that is designed to better help the agency address taxpayer problems. Corbin also serves as commissioner for the IRS wage and investment division. The IRS is encouraging people to avoid the possible headaches and holdups that can take place when you’re filing a paper return during the pandemic. Corbin said choosing to file electronically is the safest way to file a return and the quickest way to get a refund. As for those stimulus payments, the IRS had some thoughts there too. The likelihood of a third stimulus payment of up to $1,400 for individuals is on the table now. If all goes smoothly with passing the necessary legislation, some speculate that payments could be out as early as mid-March. Yet buzz is already building on how one might game that system. If you lost a job and had a sizable drop in income in 2020, some speculate that you’d want to file your 2020 federal income tax return early this year so that the IRS can base the next stimulus payment on your low income last year. It’s one way that some might get a bigger stimulus check, possibly. But Corbin cautioned that people don’t want to rush into filing a return, just to file as soon as possible. The best bet, he said, is to avoid any mistakes and only file when the correct paperwork and information that you need is available. If you don’t have the correct W-2 forms or 1099s, for example, the return is likely to face delays in processing. “We always encourage taxpayers to file the most accurate return they can,” Corbin said. The tax filing deadline is April 15 this tax season. Corbin said the IRS is not anticipating extending the deadline as it did last year due the widespread shutdowns early in the pandemic. Last year, the IRS extended the deadline all the way until July 15. Here are a few tips to consider as you prepare to file those returns: • If you collected state unemployment but did not pay enough income taxes into the system last year, you could face a penalty if you owe more than $1,000 in federal income taxes on your 2020 return. The IRS’s Corbin said Feb. 11 that the IRS does not have current plans to issue “blanket waivers” to those collected unemployment benefits but did not have enough taxes withheld. But Corbin left open a door that some taxpayers may be able to request a waiver of such penalties individually. He noted that “reasonable cause” waivers can be granted on a case-by-case basis. He said the IRS will be monitoring the situation involving taxable jobless benefits and any possible penalties relating to the lack of withholding enough in taxes throughout 2020. • Triple check your paperwork. While mail service seems to have improved in some areas, some people are still seeing mail delays. So the IRS is reminding taxpayers to make absolutely sure they have all of their tax documents, including Forms W-2 and 1099, before filing a tax return. Review last year’s tax return and consider your sources of income in 2020, especially if you did freelance jobs. Some forms may be found online through an employer or bank. “When other options aren’t available, taxpayers who haven’t received a W-2 or Form 1099 should contact the employer, payer or issuing agency directly to request the missing documents before filing their 2020 federal tax return,” the IRS said. Corbin said taxpayers should try to resolve issues first and not contact the IRS until late February if there continue to be problems with these forms, many of which should have been received already. • Crooks are still out to file phony tax returns. As part of a hot scheme in 2021, identity thieves increasingly are targeting tax professionals by sending an email that appears to be from the IRS. The phony email refers to “IRS Tax E-Filing” and verifying key e-file information. Crooks say things like: “In order to help protect both you and your clients from unauthorized/fraudulent activities, the IRS requires that you verify all authorized e-file originators prior to transmitting returns through our system. That means we need your EFIN (e-file identification number) verification and driver’s license before you e-file.” If tax pros fall for this one, the IRS notes that fraudsters can use information that’s disclosed to them to file fraudulent returns by impersonating the tax professional. The email attempts to bait tax preparers into opening a link or attachment. The threat is that if they fail to do so, their ability to e-file would be disabled. Yet these links or attachments are set up to steal information or to download malware onto the tax professional’s computer. Individuals are reminded to be wary of unscrupulous individuals who may offer to prepare your taxes but also steal important ID information from you — or part of your tax refund from you — along the way. Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at [email protected]
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